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In March, 2009, Bernie Madoff pleaded guilty to 11 federal crimes. He admitted that he had been operating a massive Ponzi scheme since the early 1990’s. The scheme was estimated to defraud investors of somewhere between $18 and $45 billion dollars. The investment operation that Bernie was overseeing may never have been legitimate.
There are certain lessons that can be learned about the Madoff case. These include:
• Returns that seemed too good to be true
• Lack of transparency
• Know the CPA firm doing the audit
• Exclusive nature of the club
• Promise of market beating returns
• Eggs and tennis balls
• Trust but verify
In future blogs I will explain each of the lessons learned from the organization relates to fraud and what action can be taken to prevent the fraud from occurring.
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Investment Income Disappears if No One Accounts for It
Most entities do an excellent job of accounting for their investments. If an investment disappeared from an investment advisor’s monthly statement, the entity would quickly discover the error. If the entity did not get credit for the scheduled interest or dividend payment on the investment would that payment be missed? Probably not.
A CPA firm was auditing a pension fund. The pension fund had numerous investments, including a $5 million dollar corporate bond. It was at a time when interest rates were high and the coupon rate on the bond was 9%. The pension fund should have been receiving $225,000 semi-annually in interest on that bond. The CPA discovered that one of the $225,000 had not been received in the past year. Further investigation revealed that a brokerage firm was “holding” the payment. Why? The answer to that question was never resolved. Without the CPA’s discovery, would the payment have been received? Probably not.
Someone within the entity should ensure that all investment income has been properly received and accounted for.
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The Fraud is not Likely to be Hidden in Miscellaneous Expense
The crook knows that the auditor is going to analyze miscellaneous expense looking for any significant or unusual transactions. Therefore, miscellaneous expense is seldom the dumping ground for the fraudulent transaction. The more intelligent crook will try to bury the fraud in an account with numerous transactions. Cost of sales is a significant account in many entities and usually consists of many transactions. Operating personnel familiar with the company’s products and/or services should periodically review what has been charged to cost of sales to determine if items have been erroneously or fraudulently charged.
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Forensic Accounting Firm
Offices in Bethesda, Maryland/Washington DC and Alexandria Virginia
presented by Bond Beebe, forensic accountants
Hello everyone, and welcome to the Forensic Accounting Blog sponsored by Bond Beebe, a Washington, DC based forensic accounting firm of certified public accountants and certified fraud examiners, with offices in Maryland and Virginia We have started this blog to provide a forum to talk about fraud, forensic accounting, forensic investigations, litigation support and their many related issues. As a firm of certified public accountants, we at Bond Beebe constantly deal with the possibility of fraud, whether performing services as auditors, tax specialists or management advisors. And, as forensic accountants, investigators, and advisors, we strive to assist our clients in the detection and prevention of fraud. So, we have set up this site to express our views and pass along information that we hope will be of interest to readers and participants. For more information on forensic accounting, please click here: Forensic Accounting
Certified fraud examiners and forensic accountants in Washington, D.C.
Although Bond Beebe will sponsor this site and the
Certified Fraud Examiners in our firm will be frequent contributors, it is our hope that many of you who are interested in fraud and forensic investigations will feel free to participate with your comments. Also, it is our intent to feature articles by Guest Bloggers from time to time to allow multiple points of view from information technology specialists, attorneys, college professors and other professionals who have devoted their careers to this topic. So, again, we welcome you and look forward to your comments.
